More shareholder democracy in new Companies Bill

Minister of corporate affairs (independent charge) Salman Khurshid in an interview with Governance Now

sweta-ranjan

Sweta Ranjan | November 12, 2010




As minister of state, Salman Khurshid holds independent charge of the ministries of corporate affairs and of minority affairs. Educated at the St. Stephen’s and Oxford, the 57-year-old advocate is a busy man as he has set out to overhaul the regulation framework for the corporate sector with the new Companies Bill. His views on corporate social responsibility have also led to a vigorous debate on its very nature. Khurshid talks about his plans in an exclusive interview with Sweta Ranjan. Edited excerpts:

What are your immediate priorities?
Absolute priority, frankly, is the Companies Bill. We have reached the last lap. The standing committee has given its recommendations. We had very widespread consultations. They had very widespread consultations. But still it can’t seem to please everyone. There are very strong views on audit firms, rotation of audit firms and the tenure of independent directors in particular. Now we are in the process of drafting or redrafting provisions and as soon as we are ready we will come back to parliament.

There are some other important issues that we have to get moving on and we have got a roadmap for them. One of them is the International Financial Reporting Standards (IFRS) conversion issue. We have a major plan for the launch of the campus of the Indian Institute of Corporate Affairs. We will bring in in-residence faculty and start the institute in a big way by December when the campus is ready. Then there is some updating of the principal acts of the professional bodies, of chartered accountants, cost works accountants and company secretaries because of the LLP (limited liability partners) legislation and because of multi disciplinary firms being now permitted. 

What major amendments can we expect in the new Companies Bill?
It will rely more extensively on disclosures, on shareholder democracy. It will have greater accountability and checks and balances within the management and within the board (of companies). It will have a code of conduct for independent directors and greater transparency in appointments and remunerations. Most important, it will look at accountancy and managerial issues, making them largely principle based – not controlled by the governmentbut consistent with our belief in enlightened regulation.

Will it also strengthen the Serious Fraud Investigation Office?
SFIO has already been strengthened in that it has to be recognised in the bill. There are some more powers that we need to give it but professionally and administratively the strength that it requires has already been provided.

When will the National Company Law Tribunal come into force?
Amended provisions will come in the bill. The supreme court has given us some clearances and some guidelines. The court wants such tribunals to be kept away from line ministries. Therefore we have asked the law ministry to tell us how we proceed from here. The issue is now before the law minister. I hope to hear from him very soon.

When should the IFRS replace Generally Accepted Accounting Principles (GAAP)?
IFRS has already arrived. The new financial year will be the beginning for the top companies of the country. Then over a three-year period we will move from different levels and finally get banks and insurance companies on board as well. By 2014-15 we should have converged to the extent that our roadmap requires us to converge.

Why is it that more than two lakh companies failed to file their annual returns in the past five years?
I think there is a whole range of reasons. We introduced the easy exit scheme and the scheme under which people who defaulted in filing returns can make up at concessional rates. Both the schemes were enormously successful. In fact, on the last day of the scheme all our systems were completely choked. We will open another window once the software for making necessary amendments is introduced. Prosecutions are not the answer because courts are in any case overloaded and slow. Moreover, they don’t give priority to what they consider to be technical wrongs rather than major criminal acts and offences.

We are now going to the second generation MCA21 [a premier e-governance initiative to streamline corporates’ interface with the Registrar of Companies]. Keeping track of the people who are not filing and using the whip a little bit more will help. We hope we will have a much better profile on this within one year.

When will the upgraded and scaled-up version of MCA21 roll out?
We are just beginning to look at the next generation MCA21. Improvements can be made in this one as well but for purposes of mining the information and making it more extensively useable by other agencies we will have to go in for the next generation and switch to the ‘extensible business reporting language’ (XBRL) format so that it can be more interactive. We are in touch with our present service provider, TCS, to upgrade the systems. But obviously the next generation (version) will have to decide how to move forward on that. It’s two years away but we will have to work for at least a year on that before we unveil it.

How has your ministry helped the corporate sector in becoming more socially responsibility?
There is an issue of mandatory CSR. Last year we issued guidelines on voluntary CSR but since then the public sector companies have been asked to plough two percent of their profits into CSR. Some people think  such mandating is not a good idea and the voluntary method was more acceptable. I think we need to work largely on the basic concept of CSR. Very clearly, it is not philanthropy, it is more than philanthropy. It’s part of an internalised approach to business. And I think CSR, ethical business issues, sustainability issues and environmental concerns combine somewhere. We need to look at it a little more carefully, define what CSR is but some features of CSR are already known and understood and the stakeholders’ concerns that are generally understood must be addressed. We have done it up till now in a voluntary manner but there is a suggestion that some of it should be made mandatory. Now we are examining it.

If CSR is done voluntarily, how do you keep a check?
Disclosure is the issue. We have said we will move towards annual statements making disclosures and where there is a failure of compliance, there should at least be an explanation. Peer pressure and public pressure are very important in these matters. As long as information is available to public and public is able to make an assessment of the quality of managerial and other decision making in the company, it might go a long way.

Your ministry has also proposed CSR credit trading.
Well, that’s again something I have asked some institutions to work on. They promised me they are working on it. ITC Green Centre is working on it. I have asked some other activist groups to work on it. I am in touch with Arun Maira in the Planning Commission as well. We are looking at how this can be institutionalised and formalised. We are waiting for a comprehensive report on this.

How will it help?
CSR is possibly easier for some people in some industry, much more difficult in another industry. If we know the mining industry has a CSR deficit they can at least finance or purchase an equal number of CSR credits from somebody else. This is what we are doing in carbon credits and I see no reason why we can’t do it in CSR but obviously it needs to be formalised into an institution of an exchange where this trading can be done.

Ratan Tata is open to the idea of an outsider taking over his mantle. Should this trend be encouraged, on the lines of Bill Gates’ announcement?
Bill Gates is a wonderful person and he has done fantastic things in terms of philanthropy and helping the needy, but apart from his personal preferences, the tax structure in the US also discourages people from passing on their fortunes to their children because the cost of transfer is very high. That’s never been acceptable in our country. Here the model of family companies is considered very important. Passing on to your own children is seen as not just important but something essential.
I think one should respect that but it’s good to have different models and if there are people who want to move to fully professionally managed companies I see no reason why they should not be encouraged.

Will such a trend also help in cleaning up the corporate sector?
Yes and no. I think we have to understand that there are no easy answers to any form of sleaze or corruption or unwholesome conduct in any institution. Laws can go up to a point but it’s the general calibre, general fibre of people, the education that we have, not just in schools and colleges but in the education that we have in our homes, our society. I think all that matters. Regulation has its own place but the leadership of society matters. When you have a Mahatma Gandhi or a Nelson Mandela (as leaders) then you have ordinary people taking a different view of life.

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